Full text of Economic Policy Review (Federal Reserve Bank of New York) : February 1951, Vol. 33, No. 2

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MONTHLY REVIEW
O f Credit and Business Conditions

FEDERAL

RESERVE

BANK

FEBRUARY

V o l u m e 33

OF

NEW

YORK

1951

No . 2

MONEY MARKET IN JANUARY
The money market passed through several alternating phases
of ease and tightness during the past month under the uneven
impact of seasonal and other factors tending to make reserves
available to the banks, of substantial nonbank investor demand
for short-term Treasury securities, and of a series of increases
in member bank reserve requirements announced by the
Federal Reserve Board toward the end of December. The
increase in reserve requirements, generally interpreted as a
further emphatic step in the sequence of System actions
aimed at restraining inflationary expansion of bank loans,
set off a series of increases in the cost of borrowing money
during the course of the month. Many commercial banks in
New York City raised the rate charged prime commercial bor­
rowers by Va of 1 per cent to 2 Vi per cent. Rates on all
maturities of prime commercial paper rose Vs of 1 per cent,
and those on all maturities of bankers’ acceptances were
increased twice during the month by a total of Va of 1 per
cent on the bid side and 3/16 of 1 per cent on the asked side.
Loans to Government security dealers were raised to V>A
from 1Vi per cent, and the Stock Exchange call rate was lifted
to 2 per cent from 1% per cent.
M e m b e r B a n k R eserves

The dominant influence upon member bank reserve posi­
tions in January was the increase in legal reserve requirements
promulgated by the Board of Governors of the Federal Reserve
System on December 29, 1950 (for the text of the announce­
ment see the January issue of this Review, page 3). The net
effect of the several increases for different classes of banks and
of deposits was to place the bulk of the rise in requirements,
1.2 billion out of an estimated total of 2 billion dollars, !n
the statement week ended January 17. Another 600 million
dollar increase became effective on January 25, and the remain­
der on February 1.
The magnitude of these adjustments, together with a num­
ber of cross currents in the market stemming from other
transactions, made for an extremely sensitive and volatile
money market throughout the month. Conditions varied from
easy to moderately tight to tight, as reflected by the fact that
the rate on immediately available Federal funds fluctuated in
wide cycles of about a weeks duration (until the final week,




when tightness prevailed throughout). Nevertheless, the initial
adjustment of member bank reserves to the higher require­
ments was not difficult for the banks. That adjustment was
facilitated by the concurrence of several large routine money
market transactions which in the three weeks ended January
17 supplied the banks on balance with an amount of reserves
approximately equal to the additional requirements. The later,
and smaller, adjustments, however, presented greater problems
to the banks.
In the period leading up to the first round of increases,
Treasury cash disbursements, including over 800 million dollars
for the redemption of certificates of indebtedness maturing
January 1, exceeded Treasury receipts by a wide margin in
spite of withdrawals of about 1.4 billion dollars from accounts
with depositary commercial banks. Suspension of calls on
Tax and Loan Accounts after January 9 tended to maintain
the Treasury’s net disbursements out of its balances with the
Reserve Banks at comparatively high figures, and for the three
weeks ended January 17, Treasury transactions made about
700 million dollars of reserve funds available to the banking
system. The usual heavy post-Christmas return flow of cur­
rency increased member bank reserves another 700 million
dollars, and other transactions added small amounts. On the
other side, a further decline in the monetary gold stock through
these three statement weeks brought with it a reduction of
300 million dollars of member bank reserves, while a modest
amount of reserves was absorbed through much of this period
by a decline in Federal Reserve "float” (outstanding checks

CONTENTS
Money Market in January.................................... .17
Further Construction Controls............................20
The President’s Budget Message.........................20
Increase in Margin Requirements...................... .24
Britain’s International Economic Position........ .24
The Security Markets.............................................27
Department Store T rade...................................... .30

18

MONTHLY REVIEW, FEBRUARY 1951

against which the banks are granted credit in their accounts
with the Reserve Banks prior to collection). Apparently the
increase in the "float” resulting from the inauguration on Janu­
ary 12 of maximum two-day availability schedules on checks
presented to the System for collection was more or less offset
by the usual short-run seasonal contractive tendencies. The
net effect of all these transactions was to place about 1.1— 1.2
billions of reserves at the banks’ disposal by the time the
first round of added reserve requirements came into effect.
It was partly in anticipation of the need to prevent such
funds from becoming a base for further inflationary expansion
of bank credit that the increase in legal reserve requirements
was imposed.
Notwithstanding the increase in reserve balances resulting
from these other factors, the banks as a whole were also sellers
of Government securities during the period preceding the
first of the increases in legal reserve requirements. Sales were
apparently necessary largely because of differences among
banks in the distribution of the added reserves, and particularly
because of the drain of funds from New York to other areas,
although the banks’ customary desire to reduce borrowings
from the Reserve Banks at the year end also accounted for
substantial sales early in the period. For the three statement
weeks (ended January 17) as a whole, total holdings of
Government securities by the weekly reporting banks in 94
cities declined roughly 1 billion dollars, while somewhat less
than half of this amount (about 460 million dollars) was
matched by net purchases for the account of Federal Reserve
Banks. Although borrowings at the Reserve Banks were
reduced about 275 million dollars around the year end, there
was a moderate increase in borrowing as the first series of
reserve adjustments approached. When these first adjustments
were completed, however, the banks were in the comfortable
position of possessing about one billion dollars of excess
reserves.
This condition was sharply reversed in the following week
(ended January 24). Receipts of personal income tax checks
became a more significant factor in the Treasury’s revenue and
enabled the Government to replenish in part its deposits with
the Reserve Banks, which had been all but depleted during
the preceding week. At the same time, a substantial decline
in Federal Reserve float and other transactions added consider­
ably to the banks’ needs for funds, which were only partly
relieved by a further reduction in the currency circulation.
Adding further to the pressures on the banks’ reserve positions
was a fairly large volume of sales of short-term Treasury
securities in the market by the Reserve System in response
to demand originating with nonbank investors. Member
banks consequently faced a net reserve drain of about 525
million dollars, which they met through borrowing about
175 million and drawing on their excess reserves for another
350 million.
Thus, the comfortable excess reserve position disappeared
just as the banks in central reserve and reserve cities were




called upon to meet the second upward adjustment of their
legal reserve ratios, amounting to about 600 million dollars,
on January 25. At the same time, the banks could not look
to ordinary money market transactions to provide any relief,
since Treasury receipts of personal income tax checks and
other collections still were larger than disbursements and the
seasonal return flow of currency had about come to an end.
In many respects, therefore, meeting the second phase of the
increase in legal reserve requirements proved more difficult
for the banks, and a much larger proportion of the increase
( together with other needs for funds) had to come directly out
of the banks’ earning assets, or from borrowings, than had
been the case for the initial and much larger adjustment.
Because of other needs for funds, net Federal Reserve System
purchases of Government securities toward the close of the
month exceeded the dollar amount of the increase in reserve
requirements.
As money market banks, the New York City institutions
had to bear not only the burden of their own adjustment to
higher reserve requirements, but also a portion of that of
their out-of-town correspondents. Thus, there was a substan­
tial shift of New York funds to other parts of the country
during the month in excess of the usual seasonal movement,
as out-of-town banks drew down their deposits in the City.
Interbank deposits of the weekly reporting member banks in
New York City fell over 600 million dollars in the four
weeks ended January 31. But the pressure on the City banks
was reduced by a partly offsetting countermovement of funds
from other areas by nonbank investors, who were paying for
Treasury securities purchased in the New York market, and
by a heavy concentration of the Treasury’s net cash disburse­
ments in New York. In part, however, these net disbursements
reflected net cash redemptions of the City banks’ holdings
of maturing Treasury bill issues in excess of the allotment of
new bills, and constituted another form in which the New
York City banks chose to bring their reserves up to the new
requirements.
Although the heavy nonbank investor demand for short­
term Government securities during the past month did pro­
vide some inflow of funds for the New York market, it also
had a tightening effect on aggregate reserve positions, partic­
ularly during the weeks ended January 10 and 24, when it
was satisfied in part through net Federal Reserve sales. This
demand also complicated the member banks’ problem of
adjusting their reserve positions, since the sale of Government
securities by the banks to nonbank investors did not give the
dollar-for-dollar increase in reserves obtained from sales of
Governments to the Reserve System. Instead, sales to nonbank
investors merely tended to reduce demand deposits (and re­
quired reserves), thus freeing reserve funds by only a fraction
of the amount of sales. As a result, the banks were compelled
to liquidate a volume of securities that was larger in dollar
amount than the amount of their residual needs for funds.

FEDERAL RESERVE BANK OF NEW YORK
G o v e r n m e n t Se c u r it y M a r k e t

To some extent, the heavy nonbank investor demand for
short-term Treasury securities which made its appearance in
the market in January merely made good a part of the lag
in reinvestment of the proceeds of sales or cash redemptions
of the Treasury bonds and certificates of indebtedness which
came due on December 15 and January 1, respectively. Indus­
trial corporations and others, whose interest in short-term
Government securities has apparently been stimulated in the
past year or so by the higher rates of return available from
such obligations, were persistent buyers during the month of
the longer maturities of Treasury bills and of Treasury notes
maturing in October and November. They also acquired
considerable amounts of the new issues of bills directly from
the Treasury, and as a result, allotments of new bills to the
commercial banks fell short of their holdings of maturing
issues. On the other hand, the commercial banks liquidated
the shorter maturities of Treasury bills and notes when seek­
ing funds to provide for higher required reserves. The Federal
Reserve System, then, tended to be the balance wheel, pur­
chasing the shorter-term bills and notes and selling the longer
maturing bills and the October and November notes. And
when reserve pressure on the member banks eased somewhat,
on two occasions during the month, persistent nonbank
investor demand for bills tended to reduce bill yields.

19

term bank-eligible issue at its January peak was 20/32 above
the quotation for the end of December.
After the 19th, some step-up in life insurance company sell­
ing of restricted bond issues, and subsequent developments
casting doubt upon the unanimity of opinion as to appropriate
interest rate policy, sent Treasury bond prices downward,
eliminating most of the earlier gains. Although prices of par­
tially tax-exempt issues moved roughly in the same direction
as those of the eligible and ineligible bonds, the major influ­
ence affecting the prices of the tax-exempts continued to be
the prospects for higher corporate taxes. Thus, the longerterm partially tax-exempt bonds showed larger initial price
gains and smaller subsequent losses than the taxable issues.
M e m b e r B a n k C r e d it

Total loans of the weekly reporting member banks fell about
115 million dollars in the four weeks ended January 24, but
the decline occurred principally in loans on securities and
loans to banks, which characteristically fluctuate widely from
week to week. Probably of greater significance was the fact
that business, real estate, and "all other” (including con­
sumer) loans experienced a sharp reduction in their weekly
rate of increase.
Commercial, industrial, and agricultural loans (i.e., "busi­
ness” loans) of the weekly reporting banks rose about 180
million dollars in the four weeks ended January 24, reaching

In adjusting their reserve positions to the higher require­

a new all-time high record of about 18 billion dollars. The

ments, the banks also liquidated a portion of their holdings

average weekly rate of increase (about 45 million dollars
a week) was less than one fourth of the December rate and
the lowest since the start of the current upswing. The tend­
ency toward declining rates of loan expansion prevailed both
among the New York City weekly reporting member banks
and in the 93 other reporting centers. This slower increase
presumably reflects the weakening of seasonal expansionary
tendencies in some lines of business.

of long-term notes (maturing in 1954 and 1955) and of
short and intermediate-term taxable bonds (callable through
1956). In the absence of sizable market demand, the System
purchased moderate amounts of these issues. Prices of most
of these issues fell in the early part of January and rose for
a time after the middle of the month; the range of these
changes, however, was very narrow.
Rumors of an agreement among interested Federal officials
that future Government financing during remobilization
would be accomplished under the current pattern of rates,
running from about IV2 per cent for one-year money to 2 Vz
per cent for long-term funds, gave rise early in the month to
a moderate upswing in Treasury bond prices. On January
18, in apparent confirmation of the earlier rumors, particularly
with respect to the 2Vz per cent rate, a speech by the Secretary
of the Treasury was followed by a sharp spurt in market
activity and a rapid one-day rise in prices. This advance
brought the Victory bonds 3/32 above the end of December
level and the shortest-term restricted issue (which becomes
eligible for bank investment next year) 18/32 above its yearend price. Price increases in the other restricted bond issues
ranged between these extremes.

Medium and long-term

eligible bonds followed a similar price pattern; the longest-




Real estate loans of the weekly reporting member banks
also continued to grow, but the increase, which averaged 7
million dollars a week for the four weeks ended January
24, was less than one fourth of the peak weekly rate during
August of last year. Some evidence that consumer credit
restrictions may be taking increasing effect appeared in the
sharp reduction in the growth of all other loans of the weekly
reporting member banks over the first four weeks of Janu­
ary. The increase averaging 9 million dollars a week was the
smallest in the past 12 months except for February 1950 when
such loans declined. Part of the past month’s gain, further­
more, included new loans to foreign governments.
During the year ended January 24, 1951, total loans and
other than Government, securities of the weekly reporting
member banks rose nearly 8.3 billion dollars, or about 28 per
cent. Since a large part of the increase in these assets was
financed through the sale of Government securities to non­

20

MONTHLY REVIEW, FEBRUARY 1951

bank investors (as shorter-term interest yields became increas­
ingly attractive), the net increase in (adjusted) demand de­
posits of individuals, partnerships, and corporations, and of
the States and their political subdivisions was held to 3.1
billion dollars, or 6 per cent over the previous year’s figure.
The New York City weekly reporting banks accounted for
approximately a third of the nationwide increase in total
loans and other security holdings, and the amount of these
earning assets held by New York banks grew by about one
third over the year, as compared with a rise of one fourth
for the weekly reporting banks in the 93 other centers. In
contrast, however, the demand deposits adjusted of the New
York City banks accounted for about a sixth of the increase
in deposits of all weekly reporting member banks, rising only
3 per cent over the year as against a gain of 8 per cent for
the other reporting member banks.
FURTHER CONSTRUCTION CONTROLS
To restrain inflationary pressures further and to release more
materials and labor for the defense program, an amendment to
Regulation X has restricted the amount of credit financing
allowed on larger residential buildings, while the National
Production Authority has issued an order banning the starting
of private commercial construction until February 15. Regula­
tion X was amended by the Board of Governors of the Federal
Reserve System, effective January 12, 1951. The amendment
has placed three and four-family residences under credit con­
trols similar to those applying to one and two-family residences
since October 12,1950. "Multi-unit” residential structures (for
more than four families), including cooperatives, were also
brought under credit controls. All new nonessential private
commercial building costing more than $5,000 was banned by
the National Production Authority on January 15. The NPA
order was issued in anticipation of a general licensing system
for private commercial construction to take effect February 15,
1951.

applies in the case of family units valued at not more than
$7,000. The maximum percentage of mortgage financing is
lower for higher-priced units, and ranges down to 50 per cent
where the cost per family unit is more than $23,500.
The new amendment makes Regulation X applicable also
to major additions or improvements to multi-unit properties,
but not to hotels, motels, rooming houses, and club houses.
The National Production Authority curbs on commercial
construction cover the hotels and motels which the Regulation
X amendment exempts. In addition the NPA has temporarily
prohibited the starting of such structures as banks, office buildings, garages, laundries, restaurants, and retail stores. Specific­
ally exempted from the order are wholesale food and fuel es­
tablishments, warehouse buildings used by manufacturers, and
construction projects of the Defense Department and the
Atomic Energy Commission. The special purpose of the NPA
order is to conserve materials for the construction of industrial
plants and for the residential expansion of communities in
which there will be expanded defense production.
All new private commercial construction started after Janu­
ary 13 is subject to the NPA curb. Exemptions will be granted
for a building started after January 13 (and before the NPA
order) only if "a substantial quantity of building material has
been incorporated”. Authorization to build private commercial
structures in the future will be given only in those cases in
which the applicant can show that the new building furthers
the defense effort, is essential to public health, welfare, or
safety, or will alleviate or prevent a hardship to a particular
community.

THE PRESIDENT’S BUDGET MESSAGE
The budget which President Truman presented to Congress
on January 15 must be regarded as a very tentative estimate

The new amendment to Regulation X , like the regulation
itself, was issued concurrently with companion restrictions by

of the Government’s fiscal activities in the twelve months be­
ginning July 1, 1951. The President has stated that both the
military and international security programs may be subject
to substantial adjustment, as the defense program progresses,

the Federal Housing Administration and the Veterans’ Admin­

and that actual expenditures will depend on how rapidly we

istration. Regulation X applies only to "conventional” loans,

are able to produce the military items for which funds are

i.e., those which are not aided by Government insurance or

made available. The possibility of important changes in the

guarantees, while the companion restrictions cover loans in­

international outlook or in the domestic economic situation

sured or guaranteed by the Government. The housing credit

should also be allowed for.

regulations of both the FHA and the VA have been amended

Actual spending in any one fiscal year, and especially in a

to bring them into general conformity with the amended Regu­

period of rapidly expanding outlays for heavy goods, may

lation X, with the VA continuing its preferential borrowing

vary considerably from the obligational authorizations granted

schedule for veterans.

by Congress for that period. Obligational authority is gen­

The maximum amount of the loans permitted by Regula­

erally given by Congress in the form of an appropriation for

tion X under the restrictions on residences of two or more

a given period. It is granted to cover, and at the same time

family units is now determined on a family-unit basis, as
against the previous "structure basis”. In general, borrowing

be incurred during the period. Most appropriations remain

is limited to no more than 83 per cent of the value per family
unit in a multi-unit residence. This maximum percentage




to act as a limit on, the amount of obligations which are to
available for making payments two years after the obliga­
tions are actually incurred. In some cases, appropriations per­

FEDERAL RESERVE BANK OF NEW YORK

mit obligations to be incurred during a period of more than
a year, some even without a time limit, and payments are
correspondingly deferrable. Plans must be made, orders placed,
and in most cases goods delivered before actual payment is
made by the Treasury. During the period of rearmament,
however, the President has indicated that advance payments
will be made whenever they may be needed for the stimulation
of defense production.
The estimate of receipts is based on existing tax legislation
and, according to Secretary Snyder, on the assumption that
personal income will rise some 5 per cent from the level in
the closing months of 1950 to around 245 billion dollars in
the current calendar year. The President indicated he would
shortly recommend an increase in taxes adequate to attain a
balanced budget, as the only sound financial basis on which
to undertake an extended period of very high defense ex­
penditures.
Expected receipts of 55.1 billion dollars in the fiscal year
1952 fall short of anticipated expenditures of 71.6 billion
dollars, resulting in an indicated budget deficit of 16.5 billion
dollars, compared with an indicated deficit of 2.7 billion in
the current fiscal year. On the basis of cash receipts and out­
lays, however, the deficit for fiscal 1952 would be 12.8 billion
dollars compared with an expected surplus of 200 million
this year.
T h e B udget A c co u n ts

The estimated budget receipts in fiscal 1952 would amount
to over 19 per cent of national income, somewhat more than
in the fiscal year ended June 1950 (about 17 per cent) but
considerably less than at the peak of the war effort (nearly 24
per cent of national income in fiscal 1945). The anticipated
Table I

U. S. Budget and Cash Receipts and Expenditures
Fiscal Years 1950-52
(In billions o f d olla rs)

Budget receipts...............................
Trust account receipts..................
Less: noncash receipts..............

Projected
1952

Estimated
1951

Actual
1950

Change 1951
to 1952

55.1
8 .6
2 .5

4 4.5
7 .3
2 .5

3 7.0
6 .7
2 .8

+ 1 0 .6
+ 1.3
- 0 .1

Cash receipts...........................

6 1.3

49.3

4 0.9

+ 1 2 .0

Budget expenditures*...................
Trust account expenditures#. . . .

7 1.6
5 .0

4 7.2
4 .5

4 0.2
6 .9

+ 2 4 .4
+ 0 .5

Less: noncash expenditures!..

2 .6

2 .6

3 .5

**

Cash expenditures.................

74.1

49.1

4 3 .2%

+ 2 4 .9

2 .2

+ 1 2 .9

3 .1

+ 1 3 .8

0 .2

Excess of cash receipts.........
Excess of cash payments . . .

12.8

Budget deficit..................................

16.5

2 .7

* Includes net expenditures of wholly-owned Government corporations and
credit agencies.
# Includes net operations and market debt transactions of partly-owned Govern­
ment corporations.
t Net of noncash expenditures and net market sales or redemptions of obligations
of partly-owned Government corporations less cash redemptions of noncash
issues. The net of market transactions in obligations of Government corpora­
tions is included with cash borrowing from the public.
t Includes a reduction of 483 million for outstanding checks in the clearing
account. In fiscal 1951 and 1952, the expected clearing account adjustment
is negligible.
** Increase of 11 million dollars.
N ote: Because of rounding, figures may not add to totals shown.
Source: The Budget of the United States Government for the Fiscal Year Ending
June 30, 1952, and Bureau of the Budget, Receipts from and Payments to the
Public, January 1951.




21

budget outlays, on the other hand, would represent around 21
per cent of the gross national product implied in the estimates.
This compares with 15 per cent in fiscal 1950, but would be
less than half the relative share which obtained in fiscal 1945.
On a cash basis, the ratio of receipts and expenditures to
income and the gross national product would be only slightly
higher than on a budgetary basis. Thus the present program
is relatively modest compared with the requirements of a
full-scale war. It will nevertheless require a major diversion
of effort and impose a severe drain on the supply of some
important materials, as the President indicated in his Economic
Report.
The estimated rise of budgetary receipts in fiscal 1952 by
some 10.6 billion dollars reflects both the full impact of the
income and excess profits tax legislation passed since the out­
break of the Korean conflict and the anticipated rise in busi­
ness activity. Collections from corporations alone are expected
to rise nearly 6.5 billion, reflecting -the higher level of cor­
porate profits before income and excess profits taxes and the
progressively greater effects of the changes embodied in recent
tax laws. Individuals are expected to pay some 4.4 billion
dollars more in income taxes in fiscal 1952, primarily as a
result of an increase in aggregate income, although some part
of the increase will arise from the fact that collections at the
higher rates fixed under the 1950 legislation will be for a
whole year, as against the nine-month period to which the
higher rates applied in fiscal 1951. Direct tax payments by
individuals will provide nearly half of the estimated budget
receipts, while corporation profits taxes will provide over 36
per cent. The share to be contributed by individuals is about
the same as in the past fiscal year, 1950, whereas that paid by
corporations is higher by 6 percentage points. Collections of
excise taxes, which provide the bulk of the remaining receipts,
are not expected to change from the current year’s 8.2 billion
dollars. Collections of old-age insurance taxes will rise sub­
stantially in fiscal 1952, but these are immediately appropri­
ated to a trust fund and do not increase budgetary receipts.
Anticipated expenditures for fiscal 1952 would be some
24.4 billion dollars higher than in the current fiscal year and
over 31 billion higher than the amount spent in the fiscal
year ended June 30, 1950. The estimated expenditures include
requirements under legislation yet to be proposed to Congress,
as well as under existing and already recommended legislation.
Expenditures for the "primary national security programs”,1
at 52.7 billion dollars, would be almost double the outlays
expected during the current fiscal year. Other activities in
fiscal 1952, at 18.9 billion dollars, would require 1.1 billion
dollars less than corresponding operations this year.
1 Under this heading are grouped outlays for the military functions
of the Department of Defense, and for the Selective Service System, the
National Advisory Committee for Aeronautics, international aid and
relations, the stockpiling of strategic and critical materials, the develop­
ment of atomic energy, the expansion of defense facilities, the adminis­
tration of price, wage, and rent controls, the Federal share of the costs
of constructing civil defense facilities and setting up a national civil
defense reserve of supplies and equipment, promotion of the merchant
marine, the Coast Guard, and the dispersal of Government agencies.

22

MONTHLY REVIEW, FEBRUARY 1951

Expenditures for the military functions of the Department
of Defense alone are tentatively estimated at 40.0 billion
dollars for fiscal 1952, compared with 20.0 billion dollars
anticipated for the current fiscal year. Congress has already
provided 42.0 billion in new obligational authority and the
President intends to request another 10.0 billion for fiscal
1951 and 60.0 billion for fiscal 1952. As proposed in the
President’s budget message, the Army is soon to be more than
twice as large as on the eve of the Korean war, the Navy
shortly will be 50 per cent stronger than a year ago, while
the Air Force has started a program to expand from 48 to 84
air wings. The largest part of the Defense Department funds
will be used to procure modern equipment, such as planes,
tanks, electronic equipment, recoilless weapons, and rockets.
Certain Items, such as rifles and naval ships, are already
available and in some cases need only be modernized. The
objective of the program is not only to support and equip
a larger active force (3.5 million men arid women as com­
pared with less than 1.5 million six months ago) but also
to provide a reserve of equipment for a still larger force,
if it should be needed, and at the same time to develop the
production capacity for moving to a full-scale mobilization
if necessary. A potential annual capacity of 50,000 planes
and 35,000 tanks is desired, but actual procurements, as cur­
rently planned, will not reach those levels. At the same time,
military research and development will move ahead and involve
outlays amounting to nearly a billion dollars.

trained and well equipped forces-in-being and a much larger
mobilization base. Whatever economic aid is given to the
North Atlantic countries will, with few exceptions, be directed
(to supporting their military build-up rather than to improv­
ing their general economic position, which has been greatly
strengthened during the past two or three years. Aid to nonEuropean areas will emphasize the building of security through
economic improvement. It is proposed that knowledge, skills,
and capital be made available to countries which request
them and which adopt the policies necessary to make such
aid effective.
Interest payments on the public debt in fiscal 1952 are esti­
mated at 5.8 billion dollars, or some 175 million more than
in fiscal 1951, while veterans’ services and benefits are estimated
to require some 4.9 billion dollars, which is about 800 million
less than in the current year. The decline in veterans’ aid is
expected to occur in education, training and readjustment
benefits, which are nevertheless expected to require 1.6 billion
dollars in fiscal 1952. Expenditures for the three groups dis­
cussed above— "the primary national defense programs”, inter­
est, and veterans’ aid— altogether will require 63.4 billion
dollars in fiscal 1952, according to the budget. Spending for
other programs is not expected to exceed 8.2 billion dollars,
a figure some 400 million less than now anticipated for the
current year. In fiscal 1950, these expenditures amounted to
9-9 billion dollars.

The stockpiling of strategic and critical materials which
are not available in this country or which cannot be produced
here at a rate sufficient to meet all-out military needs, will
be stepped up. Purchases anticipated in fiscal 1952 amount
to 1.3 billion dollars, or three times as much as was acquired
in the twelve months ended last June 30.

Net cash outlays (and the corresponding requirements for
cash) in the fiscal year 1952, under the programs presented
in the budget message, would amount to 12.8 billion dollars.
This is some 3-7 billion less than the expected budget deficit,
for several reasons. In the first place, the budget figures
include a large amount of noncash expenditures and only a
small amount of noncash receipts from Government agencies.
The noncash expenditures consist mainly of anticipated pay­
ments to the trust funds for interest and other charges and
of the net increase in accrued interest on Savings bonds.
These funds are generally invested immediately in Govern­
ment securities or held in reserve, thus requiring no immediate
payment of cash. The cash deficit in the budget accounts
alone is expected to be 13.9 billion dollars, but further reduc­
tion to a net cash outlay of 12.8 billion dollars is anticipated
through the fact that the trust funds will receive more cash
from the public than they will disburse in benefits. The
excess will be invested in Government securities, along with
the receipts of interest and payments from the Federal Gov­
ernment.
On a cash basis, some 61.3 billion dollars is expected to be
collected from the public in fiscal 1952. The increase of nearly
12.0 billion dollars is expected mainly from the higher income
and profits taxes and from increased cash collections by the
trust funds. Larger receipts are anticipated by the old-age
and survivors insurance trust fund (+ 8 6 0 million) under
the full impact of the revisions adopted last fall in the 1950

Other activities directly related to our remobilization effort
will require 3.8 billion dollars. This includes 1.3 billion
dollars for the atomic energy program, 1.1 billion for the
purchase of specialized equipment and the construction of
any Government-owned plants and facilities that may be
needed to insure an adequate supply of raw materials and
other components required in the production of military items,
300 million for the administration of economic controls, 330
million for civil defense preparations, 350 million for the
promotion of the merchant marine, 200 million for the Coast
Guard, some 160 million for the proposed dispersal of Govern­
ment facilities, and 100 million dollars for limited aid in
providing defense housing and community facilities to be
undertaken largely by private builders and local communities.
International military and economic assistance programs,
as anticipated for fiscal 1952, would require 7.1 billion dollars
— more than 50 per cent above the amounts needed in either
1951 or 1950. Over half of the 1952 total is for
procurement of military equipment to be shipped from this
country to the North Atlantic Treaty nations as they endeavor
to create, in line with the program in this country, highly




T h e C a s h P o s it io n

FEDERAL RESERVE BANK OF NEW YORK

Amendments. The medical care insurance program which the
President has again proposed to Congress would add 240
million to net cash receipts. No estimates are given to cover
the proposed further enlargement of coverage of the old-age
insurance system, the provision of disability insurance, or the
revision of the unemployment program. Cash receipts by
other trust funds will show only small changes.
Cash outlays by the Government in fiscal 1952 would
amount to 74.1 billion dollars, with the budget accounts dis­
bursing 68.9 billion of this total. Except for interest, the three
major categories of budget expenditures discussed above are
largely cash outlays. The decline in cash outlays in other
budget programs, as compared with expenditures in fiscal
1951, is estimated at about 600 million. The trust account
cash disbursements of over 5.1 billion dollars anticipated for
fiscal 1952 are some 475 million higher than in fiscal 1951,
largely as a result of higher old-age benefits and the more
liberal eligibility requirements which became effective last
October. Unemployment compensation payments are expected
to decline some 247 million, but this will be largely offset
by an increase in dividend payments by the veterans’ life
insurance funds, which are preparing to distribute, beginning
this April, some 700 million in dividends accumulated since
1948.
T h e P u b l ic D e b t

Unless new tax measures are adopted, the contemplated cash
outlays under the President’s programs for fiscal 1952 would
require that the Treasury borrow some 12.7 billion dollars from
the public. A further rise of 3.4 billion dollars in the public
debt would occur as a result of the noncash expenditures.
Thus by the end of June 1952, the direct public debt would
amount to over 276 billion dollars, or only 3.0 billion below
the peak reached in February 1946 after the Victory Loan
drive.
T h e C u r r e n t Fis c a l Y e a r

Cash receipts in the current fiscal year, ending June 30,
are now estimated to provide 49.3 billion dollars, which will
slightly more than cover cash outlays. In January 1950, cash
receipts of 43.1 billion dollars and expenditures of 45.8 billion
had been expected in this period. The change from an esti­
mated deficit of nearly 2.7 billion to an estimated small
surplus reflects not only changes in income and profits tax
rates, but also the improvement in the business situation since
the latter part of 1949, which raised receipts and lowered
outlays for unemployment compensation and for the support
of farm prices and the secondary mortgage market. Expendi­
tures for military services as now estimated are some 7.5
billion higher than they were expected to be last January,
but this rise was partly offset by a decline in the estimate
of all other cash outlays. Thus, the new estimate for cash
disbursements, as a whole, is only 3.3 billion higher, while
cash receipts in the current fiscal year are now expected to
be 6.2 billion dollars higher than seemed likely a year ago.
During the first half of the fiscal year, July-December 1950,
cash receipts (at about 20.9 billion) were some 800 million




23

T a b le II
C hange in th e P u b lic D eb t, F iscal Y ea rs 1 95 0 -5 2
(In billion s o f d olla rs)
Projected
1952
Excess of cash* (receipts — , payments + ) .
Change'in Treasury cash balance................

+

Estimated
1951

Actual
1950
+
+

2 .2
2 .0

12.7

-

0 .2
##

Borrowing from the p ublic#......................
Noncash borrow ingf....................................

12.7
3 .4

—

0 .2
3 .5

4 .2
0 .3

Increase in the Federal d e b tt .......................
Public debt at end of year**.........................
Treasury’s balance at end of y e a r...............

16.2
276.3
5 .5

3 .3
260.3
5 .5

4 .6
257.4
5 .5

* Includes receipts from seigniorage on silver amounting to about 30 million
dollars.
# M ainly cash retirement of Treasury marketable debt, net market sales and
purchases b y Government agencies and trust funds, and net sales and redemp­
tions of Savings bonds and notes. Also included are a small amount of sales
and redemptions of obligations of Government corporations and net changes
in a few minor debt items.
f Increases in special issues, noncash securities issued in paym ent for budget
expenditures, and accrued discount on Savings bonds less redemptions of
noncash issues and interest paid on Savings bonds redeemed.
t Gross direct public debt and both guaranteed and nonguaranteed obligations
of Government corporations and credit agencies held by the public.
** Gross direct public debt and a small amount of guaranteed obligations only.
## Decrease of 17 million dollars.
N ote: Because of rounding, figures may not add to totals shown.
Source: Same as for Table I.

higher than expenditures. As usual, receipts will be larger
in the second half of the fiscal year, when final payments and
adjustments in income taxes are made. This year, moreover,
higher rates will be in effect for the full second half-year
period, and corporations will begin to make payments on
their record profits obtained in the calendar year 1950. As
a result, cash receipts are expected to rise to 28.4 billion, or
7.5 billion higher than in the first six months, July-December.
However, expenditures are expected to show an even greater
rise of 8.9 billion, to 29.0 billion dollars, as the national
security programs gain momentum. A cash deficit of around
600 million thus is implied in the estimate for the second
half of the fiscal year.
So far in this fiscal year, the Treasury has redeemed about
2.5 billion dollars of the direct debt held by the public. That
part of maturing or called marketable issues which holders
did not exchange for new issues amounted in itself to 2.8
billion dollars. In large part this "attrition” reflected the
underpricing of two issues, offered in exchange last September
and October. The Treasury financed these redemptions, in
effect, by using in addition to the cash surplus, 1.3 billion
already held in the General Fund, some 400 million raised
by Government corporations in the market, 300 million from
the net sales of Savings bonds, notes, and other nonmarketable
issues, and 100 million obtained in the market early in July,
when the Treasury completed a 13-week cycle of bill borrow­
ing begun in April.
The new estimates for the current fiscal year indicate that
the Treasury intends to restore its balance to 5.5 billion dollars
by June 30. To do this and cover the expected cash deficit
of 600 million for the second half of the fiscal year, it would
be necessary to borrow some 1.9 billion in cash from the
public before June 30, if the anticipated budget estimates
are realized. The attrition on the exchange offering in January
has already absorbed over 800 million dollars, and some further
funds may be required to cover the unexchanged portion of

24

MONTHLY REVIEW, FEBRUARY 1951

a 234 per cent bond callable in June. This would indicate
a minimum cash borrowing schedule of 2.8 billion dollars in
the period January-June 1951. The amount of funds which
can be raised by the net sale of Savings bonds and notes in
this period will, in effect, determine the extent to which the
Treasury will resort to market borrowing to cover the antici­
pated requirements.
INCREASE IN MARGIN REQUIREMENTS
The following statement was issued for publication on
January 17, 1951, by the Board of Governors of the Federal
Reserve System:
"The Board of Governors of the Federal Reserve Sys­
tem today amended Regulations T and U, relating re­
spectively to margin requirements of brokers and banks,
by increasing requirements from 50 per cent to 75 per
cent, effective January 17, 1951. The increased require­
ments apply to both purchases and short sales. No other
change is made in the regulations.”
The last previous change in margin requirements was
made in 1949 when the Board of Governors lowered them
from 75 per cent to 50 per cent, effective March 30 of
that year.
BRITAIN’S INTERNATIONAL
ECONOMIC POSITION
The suspension of ECA aid to Britain as of January 1 has
focused attention on the fundamental changes that have taken
place during the past three years in the economic relations
between the sterling and dollar areas. Before 1939 the financing
of British trade deficits with the United States and Canada
had been facilitated by the United Kingdom’s very large net
"invisible” earnings from investments and services, etc., and
by the overseas sterling areas gold output and its trade surplus
with the United States. By the end of the war, this trade and
payments pattern had been completely disrupted. Far from
helping to offset the trade deficit with the dollar area during
1 946-49, Britain’s invisible transactions consistently showed
dollar deficits, while during most of the period the overseas
sterling area added to the drain with sizable deficits in its own
gold and dollar accounts. To these difficulties was added in 1947
the flight from sterling that accompanied the convertibility
crisis. As a result, during that year the sterling area had a
gold and dollar deficit of no less than 4,131 million dollars, as
shown in Table I.
To finance this huge deficit, the British authorities were ob­
liged not only to utilize more than 3,500 million dollars of
funds borrowed from the United States, Canada, and the Inter­
national Monetary Fund, but in addition to draw down the
sterling areas gold and dollar reserves by almost 620 million
dollars.1 At the end of 1947, as shown in Table II, the reserves
1 Throughout this article, 'sterling area gold and dollar reserves”
mean the United Kingdom’s official holdings of gold, U. S. dollars,
and Canadian dollars, to which members of the sterling area contribute
and on which they have the right to draw. Not included in these figures
are United Kingdom private dollar holdings and certain gold and dollar
funds held apart from the central reserves by members of the overseas
sterling area.




Table I
S terlin g A rea G old and D olla r S urplus or D eficit
(A nnu al r a t e ; in m illions o f U nited States d o lla r s ; + = credit, — = d e b it)

Item
Transactions with dollar area:
United Kingdom:
Imports (f.o .b .).................................
Exports and re-exports (f.o .b .). . .
Net invisible item s...........................
Other transactions............................

Jan.-June July-D ee. Jan.-June
1950p
1949
1949

1947

- 1 ,1 3 0
- f 734
+
110
+
70

- 1 ,5 4 4
+
626
158
+
158

- 1 ,6 4 8
+
760
254
116

- 2 ,2 7 9
+
512
549
330

Net United Kingdom bala n ce..

-

216

-

918

- 1 ,2 5 8

- 2 ,6 4 6

Rest of sterling area (net)..................

+

364

-

286

-

522

- 1 ,1 2 8 *

Gold sales to United Kingdom by rest
of sterling area......................................

+

298

+

300

+

168

+

342

+
+

16
26

-

6
132

-

8
190

-

298
339

-

48

-

98

-

114

-

62

-

6

-

236

-

312

-

699

Transactions of entire sterling area with
nondollar countries— net gold and
dollar receipts or payments:
W ith other Western Hem isphere. . .
W ith E R P countries............................
W ith other nonsterling countries and
nonterritorial organizations...........
Net balance...................................
Total net gold and dollar surplus (4-)
or deficit ( —) ........................................

+

440

- 1 ,9 2 4

- 1 ,1 4 0

- 4 ,1 3 1

p Provisional.
* Including subscription of 28 million dollars to International Bank and Inter­
national M onetary Fund.
Source: United Kingdom Balance of Payments, 1 946to 1950 (C md. 8065), p p . 24-25 •

stood at only 2,079 million dollars. In April 1948, the European
Recovery Program began. While during the following twelve
months the dollar position of the sterling area improved mate­
rially, the so-called dollar gap was still distressingly large. In
the first half of 1949, when sterling’s difficulties were aggra­
vated by the American recession, the over-all gold and dollar
deficit was at an annual rate of 1,924 million dollars. Although
in that six-month period Britain and other sterling area
countries received grants under the European Recovery Pro­
gram and various dollar loans in excess of 750 million dollars,
the sterling area’s gold and dollar reserves dropped 205 million
dollars. The area’s dollar position deteriorated further during
the summer of 1949, mainly as the result of speculation
against sterling, e.g., delays both in actual purchases of, and in
payments for, sterling area goods and services by dollar area
residents who anticipated devaluation. Finally, with the gold
and dollar reserve down to 1,340 million, sterling was devalued
on September 18. At about the same time, evidence was
accumulating that the American recession was at an end.
A remarkably swift recovery of the British gold and dollar
position ensued; in the final quarter of 1949 the dollar gap
narrowed to negligible proportions, and in 1950 it was reTable II
Sterling Area Gold and Dollar Reserves
Date
1945-December 31. .
1946-December 31. .
1947-December 31. .
1948-December 31. .
1949-June.30 ...........
September 18.
December 31.
1950-M arch 3 1 ____
June 3 0 ..........
September 30.
December 31. ,

Millions of dollars
2,476
2,696
2,079
1,856
1,651
1,340

1,688
1,984
2,422
2,756
3 ,300

Source: United Kingdom Balance o f Payments, 1946 to 1950 (Cmd. 8065), page
28, and London Times (January 11, 1951).

FEDERAL RESERVE BANK OF NEW YORK

placed by a substantial dollar surplus. This change was at­
tributable to a variety of factors, among which initially the
most important was the reduction of the sterling area’s dollar
imports. In the first nine months of 1950 British imports from
the dollar area as a whole and imports by the rest of the sterling
area from the United States and Canada2 were both running at
annual rates about half of the 1947 levels. Other factors in
the improvement include the achievement by Britain of a
surplus in its invisible transactions with the dollar area, and
the virtual elimination of dollar payments on behalf of the
sterling area as a whole to nondollar countries.3 Furthermore,
the British Treasury has indicated that, since September
1949, in marked contrast to the situation before devaluation,
there has been an influx of capital from the dollar area. While
during the final quarter of 1949 and early 1950 this move­
ment probably reflected the return of funds that had flowed
out of the sterling area in anticipation of devaluation, after
the outbreak of the Korean war it was probably linked to
expectations of larger American purchases of sterling area
commodities and to short-lived speculation on a possible
appreciation of the pound. Finally, an expansion of ster­
ling exports to the dollar area has also contributed to the
improvement of the area’s reserve position, particularly in
the last half of 1950. Until the outbreak of the Korean war,
this expansion was slow and moderate, but thereafter it was
rapid and substantial, mainly as a result of the boom in sterling
area commodity prices.4
As a result of these various changes, a trade and payments
pattern similar in certain respects to that of the 1919-1939
period was discernible in 1950: the accounts of the overseas
sterling area again showed a substantial gold and dollar surplus
in transactions with the dollar area, and this, added to the
moderate dollar surplus achieved in Britain’s invisible trans­
actions, more than sufficed to cover the greatly reduced deficits
in United Kingdom merchandise trade with the dollar area
and in the gold and dollar transactions of the sterling area as
a whole with certain nondollar countries. For the entire year
1950 the sterling area had an over-all gold and dollar surplus
of no less than 805 million dollars which, together with grants
by the Economic Cooperation Administration and various
dollar loans to the United Kingdom, was reflected in a rise of
1,612 million dollars in the sterling area’s gold and dollar
reserves, to a total of 3,300 million dollars on December 31.
Although, as Chancellor of the Exchequer Gaitskell has recently
pointed out, the December 31 figure in terms of constant pur­
2 Data on imports by the rest of the sterling area from dollar area
countries other than the United States and Canada are not available.
3 Under United Kingdom trade and payments agreements with cer­
tain nondollar countries outside the sterling area, provision is made for
transfers of gold and dollars under specified circumstances, e.g., when
sterling holdings of a nondollar country’s central bank exceed a specified
limit, the United Kingdom is obliged to transfer to that central bank
an amount of gold or dollars equivalent to the excess of sterling, and
vice versa.
4 International commodity price trends were discussed in the Decem­
ber 1950 issue of this Review.




25

chasing power was still only about one third of the 1938 re­
serves, it was nevertheless more than twice the level prevailing
immediately before devaluation.
In view of the rise in these reserves, an informal Common­
wealth economic conference decided in September 1950 to
modify the agreement reached in the summer of 1949 by the
United Kingdom and other Commonwealth governments to
reduce their countries’ dollar imports to 75 per cent of their
1948 value. Mr. Gaitskell stated in this connection that the
75 per cent formula had been invalidated by price increases,
stockpiling needs, and the deterioration of the international
political situation, but he emphasized that the Commonwealth
governments were unanimously agreed on the need to rebuild
the sterling area’s gold and dollar reserves, increase dollar
earnings, and maintain strict economy in dollar expenditures.
As already suggested, striking changes have also occurred
during the last three years in the sterling area’s economic rela­
tions with nondollar countries outside the sterling area. Gold
and dollar payments by the United Kingdom to nondollar
countries as a result of the transactions of the whole sterling
area declined from almost 700 million dollars in 1947 to 274
million in 1949, and to an annual rate of only 6 million dollars
in January-June 1950. Most of this reduction is attributable
to an improvement in the sterling area’s gold and dollar ac­
counts with the nondollar Western Hemisphere countries and
with certain of the countries participating in the European
Recovery Program. Whereas in 1947 Britain made gold and
dollar payments of 298 million dollars to the nondollar West­
ern Hemisphere countries, and of 339 million to the ERP
countries, in January-June 1950 Britain actually received gold
and dollars at an annual rate of 16 million from the former
and of 26 million from the latter.
In the second half of last year, moreover, the sterling area
built up a surplus with the members of the European Payments
Union5 equivalent to no less than 476.2 million dollars. This
surplus resulted in: (1) the disappearance of the sterling
area’s entire initial debit with the EPU of 150.0 million dollars’
equivalent; (2) a decline of 43-2 million dollars’ equivalent
in the existing sterling balances of other EPU members;
(3) the building up by the sterling area of a credit in the
EPU of 247.5 million; and (4) the payment of gold by the
EPU to Britain to the amount of 35.5 million. So long as the
sterling area’s EPU credit exceeds the prescribed 212 million
dollars’ equivalent, i.e., one fifth of its total quota, Britain will
receive gold payments from the EPU equivalent to one half of
any further surpluses of the sterling area as a whole with the
Union.
In the light of these changes in the economic relations be­
tween Western Europe and the sterling area, the British Gov­
ernment took several steps during 1950 to relax its exchange
controls and thus increase the usefulness of sterling as an inter­
national currency. Under the so-called Uniscan Agreement,
5 The European Payments Union was discussed in the September
1950 issue of this Review.

26

MONTHLY REVIEW, FEBRUARY 1951
T a b le III
U nited K in g d om E co n o m ic In d ica tors

M onth
1948-January........................................
June..............................................
1949-January........................................
J u n e..............................................
September....................................
1950-January...................................... ..
June..............................................
September....................................
N ovem ber....................................
D ecem ber....................................

Wholesale
prices
(1938 = 100)
209
219
218
229
228
241
252
268
284
n.a.

Retail prices
(June 17,
1947 = 100)
104
110
109
111
112
113
114
114
116
116

Import prices
(1947 * 100)
107
115
116
113
110
124
132
137
147
n.a.

Export prices
(1947 = 100)

W age rates
(June 30,
1947 = 100)

Industrial
production
(1946 = 100)

Registered
unemployed
as per cent of
total working
population*

106
109
113
113
113
116
119
121
125
n.a.

104
106
108
109
109
110
110
110
113
n.a.

118
123
124
130
132
135
143
144
150J
n.a.

t
1 .2
1.6
1.1
1.2
1 .6
1 .2
1 .2
1 .3
n.a.

n.a. N ot available.
* Great Britain only (Northern Ireland excluded),
f Comparable figure not available.
X Provisional.
Source: Central Statistical Office, Monthly Digest o f Statistics; Records and Statistics, Supplement to the Economist, January 6, January 20,1951.

most restrictions on current-account payments between the
residents of the United Kingdom and of Denmark, Norway,
and Sweden were abolished early in 1950, and the regulations
regarding certain capital transactions were also liberalized. By
joining the European Payments Union in the summer of 1950,
moreover, Britain undertook in effect to make sterling freely
transferable on current account among the other members of
the Union and between the latter and the sterling area as a
whole. In addition, along with other EPU signatories, Britain
agreed to end all discriminatory restrictions against imports
(both visible and invisible) from other EPU members and
to increase to at least 60 per cent the proportion of its private
trade6 with other EPU countries that was to be freed from
quantitative restrictions. In recent months, the British authori­
ties have further extended the area in which sterling may be
freely utilized for current-account purposes by including Aus­
tria, Denmark, and Greece in the sterling transferable-account
system, and they have also progressively liberalized the so-called
administrative transferability of sterling. Finally, last Decem­
ber, -the currencies of the three Scandinavian countries were
removed from the list of *'specified” currencies that must be
sold to authorized dealers for sterling when received by United
Kingdom residents.
The shifts in the international economic position of the
sterling area as a whole are attributable in no small part to
changes in the over-all balance of payments of the United
Kingdom itself. Britain’s own international transactions on
current account showed an aggregate surplus in 1950 tenta­
tively estimated by Mr. Gaitskell at 200-250 million pounds,
in contrast to the deficits of 38 million in 1949 and of no less
than 558 million in 1947. The 1950 surplus was achieved
despite a continuing deterioration of the United Kingdom’s
terms of trade caused by rising import prices, and is entirely
attributable to increased exports and invisible earnings. As
shown in Table III, the index of Britain’s import prices
(1947=100) rose to 147 in November from 124 at the be­
ginning of the year (and only 110 in September 1949 when
sterling was devalued) with the result that, although the physi­
6 As distinguished from government bulk buying, etc.




cal volume of imports in 1950 was virtually unchanged from
1949, their cost increased to 2,604 million pounds (c.i.f.),
from 2,274 million in 1949. British export prices, on the other
hand, rose much more slowly, the index (1947=100) rising
from 113 in September 1949 only to 116 in January 1950 and
125 in November. The expansion in British exports (exclud­
ing re-exports) from 1,785 million pounds in 1949 to 2,170
million pounds in 1950 accordingly reflected a 15 per cent in­
crease in physical volume in addition to the rise in prices. On
balance, these movements in import and export prices, accord­
ing to a recent estimate by Mr. Gaitskell, cost Britain nearly
300 million pounds in 1950.
The current-account surplus of the United Kingdom with
the rest of the sterling area, which had amounted to 89 million
pounds in 1947 but had risen to an annual rate of 270 million
in January-June 1949, dropped to a rate of only 160 million
in the first half of 1950. This decline was entirely attributable
to an increase, on an annual basis, in British imports from the
rest of the sterling area in January-June 1950 to 910 million
pounds, from 764 million in the corresponding period of
1949; over the same period there also were relatively small
increases both in Britain’s exports to, and in her net invisible
earnings in, the rest of the sterling area.
In the year ended June 30, 1950, moreover, Britain’s sterling
liabilities to the other sterling countries rose by 272 million
pounds to 2,497 million. Plans, however, were announced
in December 1950 for the systematic reduction of the
sterling balances held by India, Pakistan, and Ceylon. The
arrangements, which have not yet been formally worked out,
presently contemplate the release of some 247 million pounds
from the blocked sterling balances of the three countries. India
is to receive up to 35 million pounds annually for six years
beginning next July, and Ceylon up to 3 million pounds annu­
ally for seven years as from last July; details of the arrange­
ments with Pakistan have yet to be announced. Chancellor of
the Exchequer Gaitskell has suggested that by 1957 the sterling
balances of the three countries might be reduced under these
plans to something like the amounts which they would wish
to hold in any case as their normal reserves.

FEDERAL RESERVE BANK OF NEW YORK

While Britain’s current international economic position
contains elements of strength, the outlook is obscured by un­
certainty as to the impact of the expanded defense program and
of raw material shortages on the country’s economy. In the
fiscal year ending next March 31, defense expenditures were
originally budgeted at 781 million pounds, or about 6 per cent
of the estimated 1950 gross national product. After the outbreak
of the Korean war, the government announced an expansion
in the rearmament program that called, subject to United
States assistance, for maximum defense expenditures over the
next three years of 3,600 million pounds. This target has re­
cently been raised to 4,700 million pounds and Prime Minister
Attlee has indicated that in the fiscal year beginning next April
defense expenditures may reach 1,300 million pounds or 62.5
per cent more than in 1950-51 (as now estimated).
This defense program is being adopted, as British Govern­
ment spokesmen point out, by a country that is already working
at "full stretch” with little unused industrial capacity or man­
power, whose raw material position is generally tight and
whose international economic position can ill afford deteriora­
tion. Bottlenecks are already developing. Among the most
serious of these is the coal shortage. While coal production
expanded somewhat during 1950, domestic consumption in­
creased more rapidly than output and coal stocks have as a
consequence dwindled to abnormally low levels. Coal exports
have had to be curtailed and some coal has even been imported
from the United States. ;With much of Britain’s industry de­
pendent directly or indirectly on coal for power, the govern­
ment has announced a long-term plan for expanding the indus­
try’s output, and Prime Minister Attlee has called upon the
mine workers to make special efforts to increase production
during the next few months.
Moreover, the structure of British wages and prices is being
forced upward, mainly as a result of the steep rise in the ster­
ling prices of imports. By November 1950 wholesale prices
had risen 25 per cent above the predevaluation level, as shown
in Table III. Although retail prices advanced only 3 per cent
over the same period, British trade unions have been pressing
for wage increases, and the index of weekly wages (June 30,
1947=100), which had been steady since the beginning of
1950, rose three points between September and November, to
113.
With a view to minimizing inflationary pressures on the
economy, the government has indicated that, in implementing
T able IV
United Kingdom Balance of Payments on Current Account
(In m illions o f p o u n d s ; + = credit, — = d eb it)

Item

Jan.-June
1950p

1949

1948

1947

Current account:
Imports (f.o .b .).............................
Exports and re-exports (f.o .b .).
Net invisible item s.......................

- 1 ,1 5 0
+ 1 ,0 4 2
+
160

- 1 ,9 6 5
+ 1 ,8 1 8
+
109

- 1 ,7 9 0
+ 1 ,5 8 3
+
127

- 1 ,5 6 0
+ 1 ,1 3 5
133

+

-

-

-

Net balance...........................

52

38

80

558

p Provisional.
Source: United, Kingdom Balance o f Payments 1940 to 1^950 (Cmct 8065), page 7.




27

the defense program, it intends to rely mainly upon increased
productivity, on grants from the United States, and, if neces­
sary, upon a reduction in domestic consumption. There can
be little doubt, however, that the competition between the
needs of economic stability and defense will be keen. As Mr.
Attlee has observed, the main burden of expanding defense
production will fall on the capital goods industries— machinery,
vehicles, building, aircraft, and electrical goods— which pro­
duce over 40 per cent of the country’s exports, as well as much
that is indispensable for other essential home industries. It is
therefore improbable that, in these circumstances, Britain’s
international economic position can remain unaffected.

THE SECURITY MARKETS
Demand for long-term funds in the capital markets expanded
sharply in 1950 to record-breaking totals. Flotation of new
long-term security issues by State and local governments to
finance peak capital outlays, and heavy mortgage borrowing
to provide funds for record-breaking residential and other
construction activity, were primary factors in the enlarged
demand for long-term capital. Although corporate needs for
funds were larger than ever before, a substantial portion of
those needs were for short-term working capital and were
financed principally through an expansion of short-term
liabilities. A large part of the remainder was met through the
use of sharply increased internal funds in a year of highly
profitable operations. Corporate offerings of securities, there­
fore, declined for the second successive year.
The demand for long-term funds apparently outweighed
the supply of new savings available to the capital market.
Insurance companies and some other savings institutions,
therefore, disposed of a portion of their Government security
holdings to meet the demand, and commercial banks sold
such securities while adding substantially to their business
and real estate loans and other (mainly municipal) securities.
A large portion of the Government securities sold by banks
were absorbed, directly or indirectly, by nonbank investors,
particularly industrial corporations seeking short-term outlets
for temporarily idle funds, and pension funds and some
other longer-term investors acquired substantial amounts of
long-term Treasury bonds. The pressure of the demand for
funds was especially strong in the last four to six months. In
the interest of an orderly security market the Federal Reserve
System made substantial purchases of long and short-term
Government securities in the last four months of the year,
at declining prices. These purchases more than offset System
sales in the first eight months, when the supply of and demand
for funds were more in balance.
The pressure of the excess demand for long-tern funds
was felt mainly in the Government bond market, and prices
of long-term Treasury bonds canceled much of their gains
of the previous year (yields rose correspondingly). The fall
in high-grade corporate bond prices was much more moderate.
Pricey of lawer-grade corporate bonds rose,, as did municipal

28

MONTHLY REVIEW, FEBRUARY 1951

bond prices. These corporate bonds rose in response to infla­
tionary tendencies, which were also reflected in substantially
higher stock prices, while the price rise in municipals was in
response to actual and prospective increases in taxes which
raise the value of the tax exemption feature of municipal
obligations.
St o c k M a r k e t

Stock prices rose about 20 per cent during the past year.
As measured by Standard and Poor’s broad index of 416 issues,
common stock prices toward the close of 1950 reached the
highest point since May 1930. They stood at 162 per cent
of the 1935-39 average as compared with 133.5 per cent at
the end of 1949. About two thirds of the gain came in the
second half of the year, despite a sizable temporary setback
in prices in late June and early July, following the invasion
of South Korea and the events which it precipitated.
The bull market had lasted for a year and a half when the
year 1950 drew to its close. Stock prices had risen 50 per
cent above mid-1949 levels. Despite this substantial advance,
the average yield on common stocks in December 1950 ( 6V2
per cent) was higher than in the corresponding month of
1949, reflecting a considerable increase in corporate dividend
payments.
Trading gained momentum during the year as prices rose,
particularly in the second half. During the course of 1950,
public participation in stock market activity broadened for
the first time since the spring of 1946. Turnover on the
New York Stock Exchange reached 525 million shares, almost
twice the 1949 total and the largest volume of transactions
since 1933. Purchases of common shares on margin also rose.
Debit balances of customers of New York Stock Exchange
member firms grew from less than 900 million dollars at the
end of 1949 to 1.4 billion at the end of 1950, the highest
dollar total since 1937. At the same time, free credit balances
rose by about 260 million dollars to a new high level of 890
million. The Board of Governors of the Federal Reserve
System raised margin requirements from 50 per cent to 75
per cent of the value of shares, effective January 17, 1951.

securities a poor inflation hedge in view of regulated utility
rates and rising costs of materials, supplies, and labor. On
the other hand, railroad shares, which are theoretically subject
to the same limitations, rose sharply in price (40 per cent
for the year as a whole). The existence of considerable slack
in the use of railroad facilities and the prospects for substan­
tial improvement in their utilization as a result of the rearma­
ment program, with an accompanying reduction in unit over­
head costs and expansion of earnings, were responsible for
the heavy demand for railroad shares.
Thus, while share values rose substantially for the market
as a whole, price movements of individual issues and indus­
trial groups deviated considerably from the average, reflecting
the varying impact of booming business conditions and com­
modity prices and of investors’ expectations as to the effects of
the defense program and of excess profits taxes upon cor­
poration earnings and their valuation.
Although inflationary pressures were a major influence
tending to raise stock prices during the past year, the advance
in share values in the past year and a half succeeded in redress­
ing only in part the depreciation of the stockholder’s invest­
ment dollar since 1940, as shown in the accompanying chart.
Stock quotations failed to keep pace with the advance in
commodity prices during the war and the entire postwar
period, except for the last quarter of 1945 and the first half
of 1946. Nevertheless, the bull market in stocks during 1950
carried stock prices to levels toward the close of the year at
which the stockholder’s investment dollar (in terms of what
consumers buy, i.e., in terms of the consumers’ price index)
Stock Prices, Dividend Rates, and Commodity Prices, 1940-50
(M onthly, D ecem ber 1939 = 100 per cent)

Percent

P ercen t

Stock prices rose further in the first three weeks of January
1951, and the volume of transactions averaged 3.3 million
shares a day, almost 60 per cent above that for the correspond­
ing period a year earlier.
Fear of inflation born (or perhaps reborn) of the fighting
in the Far East, and the Governments determination substan­
tially to increase the country’s military strength, constituted
the most important stimulants to share prices during the year.
Marked increases in corporation profits after taxes and in
dividend payments also were an important influence. Toward
the end of 1950, prices of industrial and railroad stocks
attained new high levels since October 1929 and August 1946,
respectively. Prices of public utility shares, however, recovered
only part of their midyear losses, as investors considered these




S ource: Dividends per share (at annual rates) and stock prices per share
for 200 com m on stocks, M ood y’ s Investors S ervice; wholesale com m odity and
consum ers’ prices, U. S. Bureau of Labor Statistics. A ll data converted to a
December 1939 base by the Federal Reserve Bank of New Y ork.

29

FEDERAL RESERVE BANK OF NEW YORK

was worth about 93 cents as compared with December 1940.
This comparison does not take account, however, of the
substantial improvements and expansions of plant and equip­
ment (estimated roughly at more than 20 dollars a share for
a group of 125 industrial stocks, as compiled by Moody’s
Investors Service), which have been financed in recent years
through reinvesting the major portion of corporate earnings.
The value of stockholders’ dividend income likewise lagged
behind the advance in commodity prices during most of the
war and postwar years. As shown in the chart, it was not
until the closing months of 1948 and 1949 that stockholders’
average dividend income per share reached "parity” with the
cost of living and with wholesale commodity prices, respec­
tively (in terms of December 1940 relationships). A marked
expansion of corporate profits after taxes in 1950 resulted in
a further substantial increase in dividends paid to stockholders,
with a large volume of extra and special dividends raising
the average dividend per share to a new peak in December.
Bo n d M a r k e t

In contrast to the activity of the stock market, conditions in
the market for high-grade corporate bonds were unusually
stable in 1950. The range between the high and low months
for 1950 in the Moody’s Investors Service average yield on
Aaa corporate bonds was particularly narrow; this yield reached
its low of 2.57 per cent in January and its high of 2.67 per
cent in the last three months of the year. Yields on highest
quality corporate bonds rose very gradually during the year.
The increase was just about half that in long-term, Govern­
ment bond yields. Yields on high-grade municipal bonds, on
the other hand, fell moderately, beginning in the second half
of the year, when it became obvious that Federal income and
other taxes would have to be raised substantially to finance
remobilization, thus raising the tax exemption value of muni­
cipal bonds. The Bond Buyers’ average yield on 11 high-grade
municipal bonds declined from 1.86 per cent toward the close
of 1949 to 1.54 per cent toward the close of 1950. Lower
grades of corporate bonds, especially the railroad issues, also
declined in yield, in keeping with the increase in stock prices.
The comparative stability of the high-grade corporate bond
market not only attests to the investment character of the
demand for such obligations, but also reflects the substan­
tially smaller supply of new capital issues floated during the
year. Nevertheless, prices declined moderately, reflecting prin­
cipally the combined pressure of heavy demands for funds by
State and local governments and by mortgage borrowers,
heavy borrowing from the banks, and the effects on interest
rates of Federal Reserve efforts to restrain credit expansion.
The pressure of the increased demand for funds, which
became pronounced during the second half of 1950, was met
in part by sales of Government securities. Average yields
on Treasury bonds due or callable in 15 years or over rose




from 2.19 per cent in December 1949 to 2.39 per cent in
December 1950. The demand for mortgage funds on the part
of prospective home owners grew more insistent during the
year, and financial institutions placed a record volume of funds
in new mortgages during the third and fourth quarters of
the year. The demand for long-term funds in the aggregate
apparently exceeded the volume of savings currently made
available in the capital market, and the commercial banks met
part of the demand by adding substantially to their portfolios
of real estate loans and municipal and corporate securities.
N e w I ssues

Corporate new capital financing in the new security market
declined about 10 per cent during 1950, as corporations
financed the bulk of their enlarged needs for funds through
sharply higher retained earnings, increased depreciation allow­
ances, and a substantial expansion of their short-term liabil­
ities, including borrowings from commercial banks. The total
volume of corporate new capital security flotations amounted
to about 5 billion dollars in 1950, as against 5.6 billion in
1949. Most of the decline came in offerings of manufacturing
and public utility corporations, the latter including both tele­
phone and power and light companies.
Issues for the purpose of financing additions and improve­
ments to capital assets fell 20 per cent to 3 billion dollars,
while offerings for working capital purposes rose by about
the same percentage to 1.1 billion. Refunding issues amounted
to about 1.2 billion, a threefold expansion as compared with
1949. Although yields on the higher grades of corporate bonds
rose gradually during the year, the average for 1950 as a whole
was slightly less than that for 1949 and still less than the
1948 average, which was the peak of corporate bond yields
in the postwar years. Corporate issuers, therefore, were afforded
opportunities to save on interest charges by refunding out­
standing bonds with new issues bearing lower coupons. The
improved earnings position of the railroads also enabled
those corporations to tap the refunding market, which they
had not done in volume since 1946.
Practically all the refunding securities took the form of debt
issues. The marked contraction of new capital flotations also
came entirely in new bond issues. The substantial drop in
the latter was offset in part by a 20 per cent increase (225
million dollars) in offerings of new capital stock issues to 1.2
billion dollars, highest since 1947. Despite a buoyant stock
market, the volume of common stock offerings rose only
slightly, and practically all of the increase came in new pre­
ferred issues. To a considerable extent, the increased preferred
stock financing represented larger offerings by public utility
corporations in order to maintain their capital in proper rela­
tionship with total liabilities.
Direct or private placements of new securities with life
insurance companies and other financial institutions accounted
for a somewhat smaller proportion of total issues than in
preceding years. To a large extent, this probably reflects the

30

MONTHLY REVIEW, FEBRUARY 1951

contraction in bond offerings for new capital purposes, and
the insistent demand for mortgage money.
Despite the gradual rise in corporate bond yields, bond
offerings were well received by investors. A few new issues
were, as usual, priced too close to the market for outstanding
securities, but, a slight adjustment of offering prices was
usually sufficient to move such bonds out of syndicates
quickly.
State and local government financing for new capital
reached a new peak of 3.6 billion dollars in 1950, about 700
million dollars above the previous record in 1949. One large
State veterans’ bonus bond issue amounting to 375 million
dollars accounted for more than half the increase in the
year’s flotations. Sales of revenue and other bond issues
( exclusive of veterans’ bonds), reflecting chiefly the financing
of ’ municipal” outlays for schools, roads, hospitals, street
paving, sanitary facilities, and other public works, raised 2.9
billion dollars, or about 300 million more than in 1949.
Although there was some lag in investor demand for the
large volume of new offerings of State and local securities in
the first half of the year, this was soon reversed by the war
in the Far East, which presaged substantial increases in
income taxes to finance mobilization and a consequent rise
in the attractiveness of tax-exempt securities. The demand
for “municipal” issues grew progressively persistent toward
the close of the year as it became more evident that curtail­
ment of municipal public works expenditures in a defense
economy might reduce the supply of new issues coming on
the market and that taxes would be increased further in 1951.
Indicative of this demand, the Blue List measuring the volume
of outstanding securities offered for sale by municipal bond
dealers fell from a high point of 260 million dollars on
November 14, 1950 to 161 million at the end of December.

DEPARTMENT STORE TRADE
A recurrence of the buying spree of last summer pervaded
the retail trade centers of the United States during the month
of January. With the advantage of an extra shopping day this
year, department store sales in this District are estimated to
have been 30 per cent higher than in January 1950. Seasonally
adjusted average daily sales during January were about 286 per
cent of the 1935-39 average, or 9 percentage points higher
than the previous record set last August.
Contrary to conditions last July and August, there was little
or no evidence of "panic” buying. That is to say, the rush to
buy excessive amounts of certain items which marked the
buying wave of last summer, was not apparent. Nevertheless,
consumers were in fact spending more money relative to yearago levels than they did following the outbreak of war in
Korea last summer. Higher prices, apparently, were not deter­
ring purchases, especially of goods in which consumers felt
that shortages would later develop, but also of practically all
other types of merchandise. Sheets and pillow cases, tradition-




Department Store Sales and Stocks for Selected Departments
Second Federal Reserve District
(Percentage change from preceding year)
Sales
Department

December
1950

Jan.-D ee.
1950

Stocks on
hand Dec.
31,1950

M ain store
Household textiles.................................
Silverware and jewelry.........................
Infants’ wear...........................................
W om en’s and children’s shoes............
W om en’s coats and suits.....................
W om en’s dresses....................................
M en’s clothing........................................
M en’s furnishings and hats.................
Furniture and bedding.........................
Dom estic floor coverings.....................
M ajor household appliances...............
Housewares.............................................
Radios, phonographs, television.........
Toys and games.....................................
Sporting goods and cam eras...............
Basement store
Coats and suits......................................
M en’s clothing........................................
M en’s furnishings..................................

- 4
+15
0
- 2
+ 9
+ 2
+10
+ 9
- 1
- 6
+ 9
+ 3
+10
+ 6
+39
+ 4
+29
+ 2
- 1
+ 3

-1 7
+ 7
- 3
+ 1
+ 6
- 2
+ 3
- 4
-1 2
- 3
+ 4
- 1
+14
+ 2
+ 8
0
+67
0
+ 3
- 4

+
1
+ 23
+ 13
2
+ 49
+
5
+ 16
3
+
5
+
9
+
4
+ 17
+ 18
+ 34
+ 25
+ 19
+20 9
+ 18
+ 19
+ 22

+
+

-1 0
- 5
+ 2
+ 2

+
+

7
4
3
8

8
11
12
8

ally featured in January “white sales”, and household durables
were reported in exceptionally strong demand.
A preliminary survey of New York City department stores
revealed that for the three weeks ended January 20 sales of
major appliances and of radio and television sets increased 74
and 68 per cent, respectively, from the corresponding yearearlier levels.
R e v ie w o f 1950

Department store trade in 1950, both in the Second District
and throughout the rest of the United States, was marked by
sharp contrasts between the first and second halves of the year.
In this District’s department stores, consumer expenditures
during the first six months of 1950 were 3 per cent below the
corresponding 1949 figure. During the buying wave of July
and August, however, the demand for goods, at all levels of
distribution, reflected in many instances the anticipation of
future wants rather than current needs alone. Consequently,
despite a relative subsidence of consumer spending from Sep­
tember to November, the dollar volume of department store
sales during the latter half of 1950 was 8 per cent higher than
that of the last six months of 1949. For 1950 as a whole, the
year-to-year change was a gain of 3 per cent.
The comparatively poor sales performance early in the year
was reflected in the cautious inventory policy pursued by the
stores. With the dollar sales volume running below the yearearlier level, department stores kept their inventories close to
the comparable 1949 levels in an effort to minimize the need
for “shelf-clearing’* markdowns later on. There was, however,
some year-to-year increase in the value of outstanding orders
during the first half of 1950. Why this increase in the stores’
commitments for additional merchandise during a period of
declining sales did not result in an increase in the dollar
amount of stocks on hand can be readily explained. A large
percentage of the orders outstanding were for household dur-

31

FEDERAL RESERVE BANK OF NEW YORK
Department Store Sales for Selected Departments, Second Federal Reserve District
(Percentage change, 1949 to 1950, January-June and July-D ecem ber)

P er c e n t
+ 120

Per cent
-------1+ 120

. Radios,,
phonographs,
+ 100 — televi sion

+ 100
— +80

+ 60

Furniture
and
beddi ng

Major
household
a pp l i a n c e s

+ 40

Me n’ s
clothing

Wo me n ’s
c oa t s and
suits

Household
textiles
W o m e n ’s
dr e s s e s

+

JLI

20

0

-20

ables, which, with the exception of major appliances, were in
consistently strong demand and, with the added impetus of
liberal credit terms, were selling very well. Moreover, deliveries
of durables from manufacturers are much slower than in most
other merchandise lines and, since retailers were reluctant
to buy in great quantity, a buildup of inventories above 1949
levels did not occur.
As the chart shows, sales in some of the largest volume de­
partments from January through June were notably lower than
those of the first half of 1949. Declines in the dollar sales
volume of household textiles, of womens coats, suits, and
dresses, and of major household appliances, could be attributed
only in part to lower prices. The disappointing customer re­
sponse to the women’s apparel lines actually dated back to the
last half of 1949, when the sales volume of this merchandise
began to slump badly. As for appliances, the marked decline
in sales volume was believed by some department stores to
have resulted from a loss of customers to appliance stores,
where price cuts were reported and easy credit terms were
given wide publicity. Were it not for the excellent selling
strength of the other durable housefurnishings lines, especially
furniture and television, the over-all record of department

store trade in this District during the first half of 1950 would
have been much worse.
When the fighting began in Korea, an immediate trans­
formation in the pattern of retail activity took place. During
July and August, customers flocked to the stores in numbers
unprecedented for that time of the year. Retailers, wholesalers,
and manufacturers were similarly active as the second half of
1950 witnessed the greatest expenditure for consumer goods
for any period of like duration. The value of orders placed by
stores during the third quarter rose to heights reminiscent of
the postwar scramble for goods in 1946. Depleted stocks were
quickly replenished, and even after the panic buying of July
Department and Apparel Store Sales and Stocks, Second Federal Reserve
District, Percentage Change from the Preceding Year
\
N et sales
Locality
Dec. 1950
Department stores, Second D istrict-----

+ 6

+ 3

+15

New Y ork C ity ......................................
Northern New Jersey............................

+
+
+
+
+
+
+

+14
+12
+12
0
+15
+16
+17
+16
+ 19
+ 26
+ 12
+21
+21
+ 20
+21
+15
+ 11
+ 9
+19
+19
+24
+ 2
+12

Oct.

Dec.

Niagara Falls......................................

+ 4
+10
+10
+ 6
+ 9
+10
+ 3
+ 2
+ 11
+18
+ 4
+ 11
+ 8
+ 3
+12
+15
+ 7
+ 3
+12
+ 7
+ 5
+20

+ 8

b
+

Apparel stores (chiefly New Y ork C ity ).

+ 3

+

Indexes of Department Store Sales and Stocks
Second Federal Reserve District
(1 9 3 5 -3 9 a v e ra g e = 1 0 0 per ce n t)
1950

Westchester C ounty..............................
Fairfield C ou n ty....................................
B ridgeport...........................................
Lower Hudson River V alley...............
Poughkeepsie......................................
Upper Hudson River V alley...............
Schenectady........................................
Central New York S tate.....................
Mohawk River V alley......................

1949

Syracuse...............................................
Northern New York State..................
Southern New York State...................

Item
Dec.

N ov.

Sales (average daily), un ad ju sted ...............
Sales (average daily), seasonally a d ju sted ..

450
266

302
234

259
238

409r
242r

Stocks, unadjusted............................................
Stocks, seasonally adjusted.............................

239
263

306
266

291
258

209r
229r

r Revised.




Stocks on
J a n .th ro u g h
hand
Dec. 1950 Dec. 31, 1950

Western New York State....................

+
+
+
+
+
+
b
-

2
5
4
5
7
8
1
0
4
4
2
6
6
5
6
4
5
2

4
3
9
5
1

bio

.

+11

32

MONTHLY REVIEW, FEBRUARY 1951

and August had run its course, the stores continued to accumu­
late inventories, not only to protect themselves against possible
future shortages and price increases, but also in anticipation
of a further rise in consumer demand later in the fall season.
As had been the case during the first half of the year, the
housefurnishings group again dominated the scene in the
third quarter; sales in this group recorded some of the most
significant year-to-year increases and constituted an average of
31 per cent of total store sales during July, August, and Sep­
tember. There were, however, numerous nondurable lines in
which sales were exceedingly heavy during this period. Sales of
sheets, pillow cases, millinery, hosiery, furs, and women's coats
and suits were particularly outstanding.
Consumer demand for department store merchandise, rela­
tive to year-earlier levels, eased somewhat during the latter
part of September, October, and November, largely as a result
of the combined effects of tighter credit restrictions, spiraling
prices, and a normal reaction from the spending wave of the
midsummer months. At the same time, stocks continued to
pile up, so that by the end of November the dollar amount of
inventories held by the stores in this District reached recordbreaking proportions.

Around the second week in December when the interven­
tion of Communist China made it clear that the fighting in
Korea was not nearly at an end ( and might even spread beyond
Korea), the sales volume regained much of its earlier momen­
tum. Consumer expenditures in Second District department
stores, inflated by a steadily rising price level and by the desire
of many people to anticipate their future needs, were the
greatest ever during the month of December. Once more,
considerable interest was focused on the household durables
group, with major appliance sales recording the largest relative
increase. Sales of mattresses and of radio and television sets
were also well above those of December 1949, and among the
soft-goods lines, domestics (sheets, pillow cases, etc.) made
the best showing.
At the end of 1950, the inventory position of the stores was
not unlike that of the preceding months, although the dollar
amounts involved were, of course, substantially reduced by the
holiday trade. The value of stocks on hand on December 31
was about 15 per cent above the year-earlier volume and, with
future commitments half again as large as the 1949 year-end
volume, it was evident that the stores planned to continue the
policy of maintaining sizable inventories.

B u sin ess In d ica tors

Percentage change
1950

1949

Item
December

Unit

November

October

December

Latest month Latest month
from previous from year
month
earlier

U N IT E D STATES
Production and trade
Industrial p roduction*......................................................................
Ton-miles of railway freight*..........................................................
Manufacturers’ sales*........................................................................
Manufacturers’ inventories*............................................................
Manufacturers’ new orders, to ta l...................................................
Manufacturers’ new orders, durable good s..................................
Retail sales*.........................................................................................
Residential construction contracts*...............................................
Nonresidential construction contracts*........................................
Prices, Wages, and employment
Basic com m odity p ricesf..................................................................
Consumers' p rice s f............................................................................
Personal income* (annual rate)......................................................
Composite index of wages and salaries*.......................................
Nonagricultural em ploym ent*........................................................
Manufacturing em ploym ent*..........................................................
Average hours worked per week, m anufacturingf.....................
Banking and finance
Total investments of all commercial banks.................................
T otal loans of all commercial banks..............................................
T otal demand deposits adjusted.....................................................
Currency outside the Treasury and Federal Reserve B an ks*..
Bank debits* (U. S. outside New York C ity )................ . ..........
Velocity of demand deposits* (U. S. outside New Y ork C ity) . .
Consumer instalment credit outstandingf...................................
United States Government finance (other than borrowing)
National defense expenditures.........................................................

1935-39 =
1935-39 =
1935-39 =
billions of
billions of
billions of
billions of
billions of
1923-25 =
1923-25 =

100
100
100
$
$
$
$
$
100
100

216p
316
198p
21.2 p
3 3.8 p
24.2 p
12.3 p
12.1 p
287p
342p

215
306
194p
2 1 .Ip
33. Op
2 2 .4p
10.6p
11.4
284
323

216r
306
207
2 1.2
31.8
24.7
12.2
11.8
294
303

179
268r
165r
15.8
28.9
16.0
6 .9
10.5
255
268

#
+ 3
+ 2
#
+ 2
+- 8
+ 16
+ 6
+ 1
+ 6

+ 21
+ 18
+20
+ 34
+ 17
+ 51
+ 78
+15
+ 13
+28

358.9
175.3p
178.4
—

329.0
169.1
174.8
231.1
213
45,412r
1 5 ,603r
41.3
1,940

248.1
151.2
167.5
208.4
203
42,758
13,946
39.8
3,489

+ 4
+ 2
+ 2
#
#
#
K
+ 1
*

+45
+16
+ 7
+13
+ 6
+ 6
+ 12
+ 5
-3 6

+
+
+
+
+

1
2
3
1
4
2
1

- 3
+ 23
+ 9
#
+20
+ 15
+24

Aug. 1939 = 100
1926 = 100
1935-39 = 100
billions of $
1939 = 100
thousands
thousands
hours
thousands

45,431p
15,606p
4 1 .6p
2,229

343.8
171.7
175.6
2 31 .9p
214p
45,478
15,612
4 1.2
2,240

millions of S
millions of $
millions of $
millions of $
billions of $
1935-39 = 100
millions of $

74,720p
5 2 ,830p
9 3 ,200p
27,531
77.1
9 5.8
13,478p

73,860p
5 1 ,650p
90,700p
27,298
80.7
9 7.7
1 3 ,304p

74,600p
4 9 ,890p
8 9 ,400p
27,233
7 9.2
100.5
13,389p

77,232
42,965
85,750
27,459
6 4.2
8 3.6
10,890

4 , 504p
4 ,020p
1 ,692p

3,487
3,415
l,6 0 7 p

2,426
3,335
1,499

4,263
4,070
1,165

+ 29
+18
+ 5

+ 6
- 1
+45

122
169p
175p
172.1
7 , 199.4r
2 ,5 7 9 .0
4 4.2
3 .7
114.4

123
149
181
171.0
7 ,2 1 5 .3
2 ,5 9 6 .lr
4 3 .8
3 .5
116.6

111
154
204
164.9
6 ,9 0 5 .9
2 ,3 9 3 .0
37.8
2 .7
9 7 .8

+ 2
+13
- 3
+ 2
#
+ 1
- 2
-1 3
- 2

+12
+ 8
-1 5
+ 6
+ 5
+ 9
+15
+17
+14

millions of $
millions of $
millions of $

—

S EC O N D F E D E R A L R E S E R V E D IS T R IC T
Electric power output* (New York and New Jersey)...................
Residential construction contracts*...................................................
Nonresidential construction contracts*............................................
Consumers’ pricesf (New Y ork C ity )................................................
Nonagricultural em ploym ent*.............................................................
Manufacturing em ploym ent*..............................................................
Bank debits* (New York C ity )...........................................................
Bank debits* (Second District excluding N. Y . C . and A lb a n y ). .
Velocity of demand deposits* (New York C it y )............................
Preliminary.
r Revised.
S Adjusted
for seasonal variation.

1935-39 =
1923-25 =
1923-25 *
1935-39 =
thousands
thousands
billions of
billions of
1935-39 =

100
100
100
100

124
—
—

175.1
—

$
$
100

2 ,6 1 4 .7 p
4 3.5
3 .2
111.9

f Seasonal variations believed to be minor; no adjustment made.
# Change of leas than 0.5 per cent.
Source: A description of these series and their sources is available from the Dom estic Research Division, Fede.al Reserve Bank of New York, on request.




NATIONAL SUMMARY OF BUSINESS CONDITIONS
(Summarized by the Board of Governors of the Federal Reserve System, January 30, 1951)

Industrial output was somewhat larger in December and
January than during the autumn, reflecting mainly further in­
creases in output of producers’ equipment and military supplies.
Consumer demand for most goods showed a sharp expansion
and business demands continued strong. Retail prices of con­
sumer goods and wholesale commodity prices showed more
marked advances than in other recent months. The rate of
expansion in bank loans to business slackened in January.
On January 26, a Federal order established maximum prices
of most commodities at the highest levels existing between
December 19, 1950 and January 25, 1951. Wage and salary
rates were fixed at the rates prevailing January 25 pending
the development of adjustment procedures.
I n d u s t r ia l P r o d u c t io n

The Board’s production index in December was 216, and
in January it is estimated that the index will be close to 220
per cent of the 1935-39 average. The current level is about
one-tenth higher than in mid-1950 and one-fifth higher than
a year ago.
Output of durable manufactured goods has expanded further
following the temporary leveling off in November. Steel pro­
duction, which had been reduced by severe weather conditions
at the end of November, has increased to a rate somewhat
above the earlier record reached in October. Output of pro­
ducers’ equipment and munitions, mainly in the machinery
and transportation equipment industries, has shown substantial
further gains since last autumn. Passenger car assemblies are
near the average rate prevailing in 1950 when output was 30
per cent greater than in any other year. Production of most
other consumer durable goods and building materials has been
maintained close to the record levels reached in the second
half of 1950.

Production of nondurable goods in December and early
January has continued at peak rates, reflecting mainly a sus­
tained volume of output of textile, paper, petroleum, and
chemical products 10 to 20 per cent above year-ago levels.
Minerals output declined slightly in December, as activity
at iron ore mines was reduced from the exceptionally high
autumn rate and as crude petroleum production was curtailed
somewhat. Petroleum output increased again in mid-January
to a new record rate.
C o n s t r u c t io n

Value of construction contract awards increased in Decem­
ber, reflecting a further contraseasonal expansion in awards
for public work and gains in private nonresidential awards.
For the year, value of awards was two-fifths larger than in
1949, with substantial increases in almost all categories. The
December rise in housing starts to 95,000 from 85,000 in
November reflected a sharp increase in publicly financed units.
Total starts of almost 1,400,000 in 1950 were more than onethird greater than the previous record in 1949.
Em p l o y m e n t

Nonagricultural employment showed the usual large sea­
sonal rise in December, reflecting mainly temporary increases
in trade and post office employment. Average hours of factory
workers rose to 41.6 per week, the highest in five years, and
average hourly earnings continued upward, reflecting increases
in wage rates and more overtime pay.
D is t r ib u t io n

Since the early part of December, value of department store
sales has been considerably above corresponding periods of
other recent years. Increases in sales of household durable

INDUSTRIAL PRODUCTION

Federal Reserve indexes.




M onthly figu res; latest shown are for December.

F. W . D odge Corporation data for 37 Eastern States.
latest shown are for December.

M onthly figures;

goods have been large, as during the upsurge in buying last
summer, and there have also been sharp increases in sales of
apparel and various other goods. Despite record sales for this
season, stocks have been maintained at high levels as a result
of the very large volume of output. Purchases of new pas­
senger automobiles have shown marked increases from the
reduced level reached in November which was still about 10
per cent higher than in November of any other year.
C o m m o d it y P rices

Wholesale prices generally continued to advance during the
first three weeks of January. Increases for basic commodities
approached the rapid rate of rise of the summer months.
Marked advances also occurred in wholesale prices of numerous
industrial products and foods prior to the announcement of
general price controls on January 26.
The consumers’ price index rose 1.6 per cent from midNovember to mid-December, the largest monthly increase of
the year, as retail food prices advanced 3 per cent. Since that
time retail prices have generally continued to rise; foods have
exceeded the July 1948 high.
B a n k C r e d it

Bank loans to business continued to expand rapidly in
December but increases were less marked in the first three
CONSUMERS’ PRICES

Bureau of Labor Statistics’ indexes. “ A ll items” includes housefurnishings,
fuel, and miscellaneous groups not shown separately. Midm onth figures;
latest shown are for December.




weeks of January. The expansion in real estate and consumer
loans was smaller in the December-early January period than
in previous months.
Average interest rates charged by commercial banks on short­
term business loans rose from 2.6 per cent in the first half
of September to 2.8 per cent in the first half of December.
In early January, leading city banks announced further increases
in rates to business borrowers.
Required reserves of member banks were raised by more
than one billion dollars in mid-January as a result of the
first step in the graduated increases in reserve requirement
percentages announced in late December. Banks met this
increase with funds obtained from a seasonal decline in
currency in circulation and a reduction in Treasury deposits
at Reserve Banks and by reducing excess reserves and selling
Government securities.

Se c u r it y M a r k e t s

Yields on Government securities and high-grade corporate
bonds continued to show little change during the first three
weeks of January. Prices of common stocks rose further and,
effective January 17, the Federal Reserve raised margin require­
ments for purchasing or carrying securities from 50 per cent
to 75 per cent.
SECURITY MARKETS

Stock prices, Standard & P oor’ s C orporation; corporate bond yields,
M ood y’s Investors S ervice; U . S. Government bond yields, U . S. Treasury
Department. W eekly figu res; latest shown are for week ended January 20.